World Bank Chief Zoellick Clarifies Gold Position

As a follow-up to my previous post, it is gratifying that my doubts about what many thought World Bank President Robert Zoellick said were valid. He certainly isn't advocating a return to the gold standard. The important clue, of course, is that he didn't mention gold right off the bat but as his fifth and final point in a list of five actions to get the world economy going again in a more harmonious manner. Again, he mentions gold in the context of forming a basket of references including many reserve currencies. In effect, the soaring price of gold is a wake-up call to those who should know better:

The soaring price of gold reflects international unease about the strength of large developed economies that must be taken seriously by the Group of 20 leading nations, according to Robert Zoellick, president of the World Bank. Mr Zoellick on Wednesday said the increasing use of gold as a monetary asset was an “elephant in the room” that was being ignored by policymakers in the debate over how to correct global trade and fiscal imbalances. The World Bank head added that the search for an alternative to the weak currencies of much of the developed world underlined the need for a co-ordinated package of growth measures based on free trade and structural reforms.

Mr Zoellick dismissed criticism of his proposal in Monday’s Financial Times for a new international monetary system involving multiple reserve currencies and including a role for gold as a reference point for market expectations of inflation and future currency values. He said critics had misunderstood his proposal as a call for a return to the gold standard – the framework of fixed exchange rates backed by gold which was replaced after the second world war by the Bretton Woods system of fixed but adjustable exchange rates.

Speaking at a Financial Times conference on infrastructure spending, Mr Zoellick said the price of gold, which this week surged past $1,400 a troy ounce, indicated that the world was heading towards a new monetary system in which the US dollar would be only one of a number of reserve currencies with flexible exchange rates. Others would include the euro, the yen, the pound and the renminbi, as China moved towards removing controls on the convertibility of the currency.

“Gold is now being viewed as an alternative monetary asset. This is not the same as a gold standard,” said Mr Zoellick. “Gold has become a reference point because holders of money see weak or uncertain growth prospects in all currencies other than the renminbi, and the renminbi is not free for exchange. “So, in relative terms, gold is appealing to people who ask where should I put my money. It is a hedge against uncertainty.”

Mr Zoellick said the use of gold indicated that the largest economies “need pro-growth policies, structural reforms, open trade and an anti-protectionist agenda”. He said that would build confidence in private sector development.

Again, my conviction is the same: as a Republican, Zoellick is using this opportunity in light of the upcoming G-20 summit to warn the US of its various fiscal and monetary shenanigans further diminishing international stature. Would the price of gold be going through the roof if the US were running conventional policies? Think about it for a moment. Zoellick is merely expressing sentiments others like China have expressed about a messed up system which is dominated by a messed up country run by pansies.

That said, I sure would like to hear Zoellick elaborate at greater length on how to reform the international currency system since the outline he provided basically just points out that people are using gold as another price reference. It's one thing to suggest that gold's price is being used as a reference, but another to incorporate it into a basket of reserve currencies alike the SDR.